CHAPTER 22Some Rules of the Road for Risk Management: Axiom 6
Just as risk is intimately connected to volatility, volatility is connected to leverage and liquidity. It is best to view liquidity as multifaceted and capture its essential facets based on different points of view. Hang on at the end; the excursion argument presented is an illustration from potential theory of how our reliance on statistical independence is a dead end when it meets a dose of realism.
AXIOM 6
There is a strong connection between leverage and volatility.
Leverage and volatility are negatively correlated because high volatility leads to reduced leverage and low volatility forces investors to leverage up. Leverage does not lead volatility—it lags.
Leverage introduces ...
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